Paper F6 (LSO) Taxation (Lesotho) Thursday 7 December Fundamentals Level Skills Module. Time allowed: 3 hours 15 minutes

Transcription

1 Fundamentals Level Skills odule Taxation (Lesotho) Thursday 7 December 2017 Time allowed: 3 hours 15 minutes This question paper is divided into two sections: Section A ALL 15 questions are compulsory and UST be attempted Section B ALL SIX questions are compulsory and UST be attempted Tax rates and allowances are on pages 2 3. Do NOT open this question paper until instructed by the supervisor. Do NOT record any of your answers on the question paper. This question paper must not be removed from the examination hall. Paper F6 (LSO) The Association of Chartered Certified Accountants The Lesotho Institute of Accountants

2 SUPPLEENTARY INSTRUCTIONS 1 Calculations and workings need only be made to the nearest. 2 All apportionments should be made to the nearest month. 3 All workings should be shown in Section B. TAX RATES AND ALLOWANCES The following tax rates and tax allowances are to be used in answering the questions: Second Schedule (Section 9(1)) Resident individual income tax rates Chargeable income Rate of tax First 56,964 20% Over 56,964 30% Personal tax credit 6,732 Withholding tax rates Payments to resident contractors 5% Payments of interest by a resident to a resident 10% Payments of Lesotho services contract to a non-resident 10% Payments of international transactions 25% (A lower withholding tax rate may apply under a double tax treaty entered into by the government of Lesotho) Third Schedule (Section 10) Resident company income tax rates Nature of income Rate of tax 1. anufacturing income derived from a manufacturing activity of an industrial, scientific or educational nature which promotes industrial, scientific educational or other development within Lesotho 10% 2. Other manufacturing income 10% 3. Other income 25% The applicable rate is 30% Fourth Schedule (Sections 109 and 116) Tax rate for trustees, fringe benefits and electing non-residents 2

3 Fifth Schedule Section 16(2)) inimum chargeable income The multiplication factors are: Air travel 100% Electricity amount 100% Principal residence amount 5% Schooling amount 100% Secondary home amount 5% Vehicle amount 25% The amounts specified are: Air travel amount 2,500 Electricity amount 3,000 Principal residence amount 150,000 Schooling amount per child 1,000 Secondary home amount 20,000 Vehicle amount 20,000 Sixth Schedule (Section 41) Declining balance depreciation rates: Group Depreciation rate Assets included 1 25% Automobiles, taxis, light general purpose trucks, tractors for use over-the-road, special tools and devices. 2 20% Office furniture, fixtures and equipment, computers and peripheral equipment and handling equipment, buses, heavy general purpose trucks, trailers and trailer mounted containers, construction equipment. 3 10% Any depreciable asset not included in another group. 4 5% Railroad cars and locomotives and railroad equipment, vessels, barges, tugs, and similar water transportation equipment, industrial buildings, engines and turbines, public utility plant % ining Value added tax (VAT) Standard rate 14% Supplies of electricity and telephone calls 5% Basic foods and agricultural inputs 0% Exports 0% 3 [P.T.O.

4 Section B ALL SIX questions are compulsory and UST be attempted Please write your answers to all parts of these questions on the lined pages within the Candidate Answer Booklet. 1 piti, an individual resident in Lesotho, established a trust fund in In June 2014, piti died and his will provided the following information: piti s wife, akananelo, should become a trustee of the trust set up in 2012 and will be entitled to 65% of the trust income. piti s only child, Kananelo, will also be a beneficiary of the trust income, and entitled to the remaining 35% of the trust income. The trust income for the years ended 31 arch 2016 and 2017 is as follows: Lesotho source 140, ,000 Foreign source trading income (see below) 52,000 65, , ,000 The foreign source trust income of 52,000 for the year ended 31 arch 2016 is before taking into account a trading loss of 25,000 realised in the same trade in the previous year ended 31 arch (a) Calculate the tax payable by the trustee ( akananelo) for the years ended 31 arch 2016 and 2017 respectively. Note: You should assume that the same tax rates and allowances were applicable throughout the years ended 31 arch 2016 and (6 marks) (b) Calculate the tax payable by the beneficiary (Kananelo) for the year ended 31 arch (2 marks) (c) State any two conditions which should be satisfied for the trustee to be chargeable to tax on the trust s foreign source income. (2 marks) (10 marks) 9 [P.T.O.

5 2 Leseli otors, a local vendor, buys and sells used cars and spare parts. Due to stiff competition in the industry, Leseli otors incurred losses in the last three years and is now contemplating deregistering for value added tax (VAT) purposes. The following information was extracted from the books of Leseli otors, for the tax period ended 31 October 2017 Note Revenue 1 63,000 Operating expenses (taxable at standard rate where applicable) 2 68,000 Operating loss (5,500) All amounts are inclusive of value added tax (VAT) where appropriate. Notes: (1) The revenue figure comprises the following: (i) 45,000 in respect of the sale of a saloon car 1. The car cost Leseli otors 34,000 and was originally acquired from a non-vendor. Leseli otors incurred repair expenses of 6,000 to put the car into a saleable condition, of which 25% were paid to a non-vendor. (ii) A monthly instalment of 3,500 in respect of a saloon car 2 which was sold on a deferred payment basis. The market value of the car on the date of sale was 42,000. The instalments are payable over a period of 12 months, commencing on 31 October (iii) Operating lease payments of 2,300 in respect of a delivery truck. The lease contract states that Leseli otors will receive monthly payments of 2,300 over a six-month period starting from 1 October (iv) 12,200 in respect of the sale of spare parts to a sister company. This amount is below the fair market value of the parts by 3,000. (2) The operating expenses figure includes an insurance premium of 3,200. (a) Calculate the VAT payable by or refundable to Leseli otors for the tax period ended 31 October 2017 and state the due date for the submission of the VAT return. Note: Itemise all revenue and expenditure items and indicate those which do not result in VAT payable or reclaimable by the use of a zero (0). (8 marks) (b) State the obligation of a vendor to the Lesotho Revenue Authority (LRA) when deregistering from value added tax. (1 mark) (c) Comment on whether Leseli otors would be entitled to apply for deregistration. (1 mark) (10 marks) 10

6 3 Lerotholi was recently diagnosed with a terminal disease and due to his ill health, he liquidated some of his assets to cover his medical expenses. The following assets were sold at their market values on 31 arch 2017: Cost arket values Shares 150, ,000 Factory building (see below) 515,000 2,300,000 The cost of the factory building comprises the following: (1) 25,000 for the land on which the building was erected. The market value of the land at the date of purchase was 35,000 but Lerotholi purchased the land from a business associate at a reduced price in December (2) 320,000 for the construction of the factory building in September (3) 85,000 for building a security wall around the factory building which was completed in July (4) 20,000 for paving the entire compound of the factory building in June (5) 65,000 on 31 arch 2017 for equipment and surveillance cameras installed in the building. This amount represents the total adjusted cost base (ACB). Other relevant information: (1) The trading results of Lerotholi for the year of assessment ended 31 arch 2016 showed a loss totalling 36,000, of which 5,500 related to the sale of some shares held in a local company, and 30,500 related to his trading operations. (2) Lerotholi incurred estate agent fees of 4,500 in respect of the sale of the factory building. (3) The indexation numbers on the relevant dates are: December September July June arch (a) Calculate the chargeable gain and/or chargeable business income arising on the sale of assets by Lerotholi for the year ended 31 arch (7 marks) (b) State ANY THREE examples where neither a gain nor a loss is recognised for tax purposes on disposal of an investment asset. (3 marks) (10 marks) 11 [P.T.O.

7 4 Thomas, an expatriate taxpayer, is working as a country director for the World Health Organisation (WHO), a public international organisation (PIO). His remuneration package for the year ended 31 arch 2017 consisted of the following: (1) A basic salary of 420,000 per annum. (2) A fully furnished rented accommodation paid for by Thomas s employer which cost 8,500 per month. Thomas contributes 1,000 per month towards the provision of this benefit. (3) A motor car which is used for both business and private purposes. The market value of the car was 310,000 when it was provided to Thomas in February (4) An education allowance of 10,500 per annum per child for each of Thomas s two sons. (5) A non-contributory pension fund into which Thomas s employer contributes 10,200 per month on Thomas s behalf. (6) Expenses paid by Thomas s employer which total 28,200 per annum for the following: Security guard 13,300 obile phone bill 14,900 28,200 (a) Calculate Thomas chargeable employment income for the year ended 31 arch Identify by the use of a zero (0) any item(s) which are exempt. (4 marks) (b) Calculate the fringe benefits tax (FBT) payable in respect of the fringe benefits provided to Thomas by the WHO for the year ended 31 arch 2017, assuming the WHO is a tax exempt employer. (6 marks) (10 marks) 12

8 5 Lefa and Brian run a business in partnership sharing profits and losses equally. Lefa is a resident partner and Brian is a resident non-resident partner. The partnership operating profit for the year ended 31 arch 2017 was 197,250 after taking the following items into account: Income Gross profit 561,250 Net interest from local banks 38,880 Gross income from foreign banks (withholding tax amounts to 3,500) 21, ,250 Expenses Salaries: Lefa 75,000 Brian 75, ,000 Employer superannuation fund contributions: Lefa 22,500 Brian 22,500 45,000 Depreciation 85,750 Trading loss brought forward 18,250 iscellaneous expenses (all tax deductible) 125, ,000 Additional information: The fixed asset register of the partnership as at 31 arch 2017 reflects the following information: Assets Acquisition date Cost Rate Depreciation Buildings 1 February ,500 10% 39,750 Vehicle 1 August ,000 30% 36,000 Office equipment 1 February ,000 25% 10,000 85,750 (a) Calculate the notional chargeable income of the partnership for the year ended 31 arch Note: You should start your calculations with the partnership operating profit of 197,250. (6 marks) (b) Calculate the tax payable by each of the partners for the year ended 31 arch 2017 and state the due date of payment of the tax liability. Note: Indicate by the use of a zero ( 0 ) any items which are not taxable or not allowable. (9 marks) (15 marks) 13 [P.T.O.

9 6 PP Securities (PPS) is a wholly owned subsidiary of a South African company, was incorporated in Lesotho in arch 2016, and commenced its operations in Lesotho in October PPS s year end date is 30 November, which is close to but not the same as that of its holding company in South Africa. For consistency, the company is planning to use 30 November as its substituted accounting period. The following is the summarised financial information of PPS for the year ended 30 November 2016: Note Revenue Trading income 430,000 Investment income 1 120, ,000 Expenses Administrative expenses 2 205,000 Selling and distribution costs 3 180, ,000 Notes: 1. Investment income includes the following: (i) 42,000 dividends received from a local company. (ii) 85,000 dividends (gross) received from the foreign companies. The related foreign withholding tax is 22, Administrative expenses include the following: (i) Repairs and maintenance of the company s vehicles for 94,000. Included in this amount is 72,000 for the purchase of equipment on 1 June No further record was made in the books of the company regarding this purchase. (ii) Provision for directors emoluments of 60, Selling and distribution costs comprises the following: (i) arketing and advertising costs of 150,000. Included in this amount is 110,000 in relation to large scale advertising which was incurred prior to commencement of operations of the company. (ii) Donations of 30,000 in total, 45% of which was donated to one of the local orphanages. The remaining 55% was extended to one of the local soccer teams and paid in accordance with the relevant income tax provisions. Relevant information: On 30 September 2016, PPS paid dividends of 74,000 to its shareholders. The dividends were paid entirely out of unqualified income. (a) Advise PP Securities on the procedure it should follow to use a substituted accounting period and the grounds it has for using a substituted accounting period. (2 marks) (b) Explain how PP Securities qualifies as a resident company. (3 marks) (c) Calculate the advance corporation tax payable (ACT) by PP Securities in respect of the dividends paid on 30 September 2016 and state the due date of payment. (2 marks) (d) Calculate the corporation tax payable by PP Securities for the year ended 30 November End of Question Paper (8 marks) (15 marks) 14